Paying Off House

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
bg5
Posts: 19
Joined: Mon Jan 15, 2018 11:07 am

Paying Off House

Post by bg5 » Thu Jan 18, 2018 12:20 pm

Hey Gang,

My wife and I are putting 10% of our pay into retirement and have a healthy some of money already there. Additionally, we will have pensions through work and we have also putting a nice chunk of cash each month into a 529 for our kids. Additionally, we have 6 months savings in the bank as an emergency fund.

We now want to start putting a little money into our house to pay it off. We have a 4.25 % interest rate on a 30 year mortage and we owe around $247,000 on a home that is worth probably $500,000.

My questions is does it make sense to take lets say $500-$600 a month a take it directly off the balance? Or should we take that $500-$600 a month and put it into a mutual fund and gamble a bit and lets say in 10 years cash that money out and take it directly off the balance? I am comfortable with rolling the dice but just want some others thoughts.

Thanks,

BG5

chevca
Posts: 1464
Joined: Wed Jul 26, 2017 11:22 am

Re: Paying Off House

Post by chevca » Thu Jan 18, 2018 12:27 pm

At 4.25%, I'd probably just pay that down and call it good. That might be a tough number to beat after taxes over 10 years. Or, maybe you beat it... but, by how much? If not by much, was it worth the risk? I'd take the safe 4.25%. It's an individual decision though.

Olemiss540
Posts: 478
Joined: Fri Aug 18, 2017 8:46 pm

Re: Paying Off House

Post by Olemiss540 » Thu Jan 18, 2018 12:30 pm

chevca wrote:
Thu Jan 18, 2018 12:27 pm
At 4.25%, I'd probably just pay that down and call it good. That might be a tough number to beat after taxes over 10 years. Or, maybe you beat it... but, by how much? If not by much, was it worth the risk? I'd take the safe 4.25%. It's an individual decision though.
Agree
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

quantAndHold
Posts: 1701
Joined: Thu Sep 17, 2015 10:39 pm

Re: Paying Off House

Post by quantAndHold » Thu Jan 18, 2018 12:43 pm

It depends on the things you left out. How much do you have in retirement and non-retirement accounts? How old are the kids, and how close to retirement are you?

The main thing I worry about with paying the mortgage instead of investing is the lack of liquidity. Once you pay that money into the house, it’s locked in that house, unless you sell the house or refi or get a HELOC. Keep in mind that refis and HELOC’s aren’t deductible anymore. If you are saving well (15%) and already have a good enough cushion outside of the house to handle anything unexpected that comes along, then consider paying the mortgage early. But there is an opportunity cost. At one point in my life, I moved to a new city, and was able to put a healthy amount of money into a down payment on a second house, because I had the money in my brokerage account instead of in my house.

The only thing I would say is to plan on paying the mortgage off before you retire. Other than that, it’s a trade off between that stable return, and having liquidity for other opportunities that come up.

User avatar
unclescrooge
Posts: 2084
Joined: Thu Jun 07, 2012 7:00 pm

Re: Paying Off House

Post by unclescrooge » Thu Jan 18, 2018 1:17 pm

Personally, I wouldn't. But that's just me.
I don't think there's a right answer here.
But if you want to pay off the mortgage, you should refi into a 15 year at a lower rate.

mrpotatoheadsays
Posts: 223
Joined: Fri Mar 16, 2012 2:36 pm

Re: Paying Off House

Post by mrpotatoheadsays » Thu Jan 18, 2018 1:26 pm

bg5 wrote:
Thu Jan 18, 2018 12:20 pm
My questions is does it make sense to take lets say $500-$600 a month a take it directly off the balance? Or should we take that $500-$600 a month and put it into a mutual fund and gamble a bit and lets say in 10 years cash that money out and take it directly off the balance? I am comfortable with rolling the dice but just want some others thoughts.
By using Plexus Asset Management's analysis of future S&P 500 returns, at the current PE (PE10) of 33.86, over the next 10 years, on average, you can predict an annual real return of less that 1.3%. Using an inflation rate of 2.0%, that would be less than a 3.3% annual return. When you sell the mutual fund, you will also be taxed on any gains. Therefore, given the current valuation of the S&P 500, it would be wiser to pay down or pay off your mortgage. If tomorrow, the market crashes and S&P 500 PE10 drops below 6.0 then I have a different story.

Jack FFR1846
Posts: 6829
Joined: Tue Dec 31, 2013 7:05 am

Re: Paying Off House

Post by Jack FFR1846 » Thu Jan 18, 2018 1:33 pm

The choice is up to you and it comes in two classes:

Guaranteed return: pay the mortgage.

Roll the dice on the market where you might win......or you might lose: don't pay the mortgage, put it into the stock market.

cue ZZ top
Bogle: Smart Beta is stupid

soccerrules
Posts: 534
Joined: Mon Nov 14, 2016 4:01 pm

Re: Paying Off House

Post by soccerrules » Thu Jan 18, 2018 2:03 pm

I might check and see what a refi on a 15yr looks like and see if that helps with the rate any. However, it does appear you may be a decent number of years into your 30 year now with a 50% equity position.

Without having a really clear picture of your financial situation and job/income stability, I would opt for paying the extra on a monthly basis. It gives you flexibility, liquidity and guaranteed return.

We refinanced in 12/2010 to a 15 year with a lower rate. We had an add-on construction loan that we rolled into the single 15 year and it lowered our monthly outlay by $500-600. For about 3 years I paid the older higher amount, putting the $500-600 difference toward principal. Kids got older and more expensive (sports, car, college)so I stop the extra payments.

If I pay the mortgage out as is, I will be done 3 years earlier. I was thinking more about being debt free than I was about a guarantee return, but that was pre-Boglehead.
Don't let your outflow exceed your income or your upkeep will be your downfall.

runner3081
Posts: 1261
Joined: Mon Aug 22, 2016 3:22 pm

Re: Paying Off House

Post by runner3081 » Thu Jan 18, 2018 3:02 pm

I would only pay the mortgage after maxing all available 401K, HSA and ROTH (or ded IRA) accounts.

Once those are done, then plow money into the mortgage.

cusetownusa
Posts: 270
Joined: Thu Mar 27, 2014 9:54 am

Re: Paying Off House

Post by cusetownusa » Thu Jan 18, 2018 3:29 pm

runner3081 wrote:
Thu Jan 18, 2018 3:02 pm
I would only pay the mortgage after maxing all available 401K, HSA and ROTH (or ded IRA) accounts.

Once those are done, then plow money into the mortgage.
I agree with this...I would not pass up the tax advantage space to pay down your mortgage.

User avatar
Meg77
Posts: 2254
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: Paying Off House

Post by Meg77 » Thu Jan 18, 2018 3:41 pm

I agree that you should look into refinancing to a 15 year mortgage. You could lower your rate to around 3.4% today, and you'd be automatically paying it down faster than you are now (unless you are more than 15 years into a 30 year loan). If you think you may pay it off in less than 10 years, it may be worth it to look at a 5 or 7 year ARM to get the rate even lower.

Taxes matter here to some degree. Most people will be filing with the standard deduction now, so mortgage debt doesn't save you any on taxes anymore for 95%+ of households. But if you are in the other 5% due to large charitable gifts or something, then your effective mortgage rate may be lower than the stated mortgage interest rate. Also, if you are in a high tax bracket then you could be better off adding to a 401k or other retirement account and getting the deduction as opposed to prepaying a mortgage.

Personally I think eliminating the mortgage is a great goal, and it can enable you to take more risk in your portfolio. There's no point buying bonds with an expected return of 2% or so when you have a loan at more than double that cost you could just pay off instead.
"An investment in knowledge pays the best interest." - Benjamin Franklin

Chadnudj
Posts: 705
Joined: Tue Oct 29, 2013 11:22 am

Re: Paying Off House

Post by Chadnudj » Thu Jan 18, 2018 4:06 pm

cusetownusa wrote:
Thu Jan 18, 2018 3:29 pm
runner3081 wrote:
Thu Jan 18, 2018 3:02 pm
I would only pay the mortgage after maxing all available 401K, HSA and ROTH (or ded IRA) accounts.

Once those are done, then plow money into the mortgage.
I agree with this...I would not pass up the tax advantage space to pay down your mortgage.
I'll agree with these two posters....but I'll also echo someone else above (not sure who) that recommended investing that money instead in a taxable account (after, of course, maxing out 401ks, ROTHs, etc.).

Houses are illiquid assets. While it's a crapshoot as to whether you'll get a better return investing vs. paying down the mortgage, what is guaranteed is that if an emergency (job loss, accident, etc.) happened and you needed access to funds, you can't easily turn your paid down mortgage into liquid cash (even if those investments are down 50% in a worst case scenario market, you'd still have 50 cents on every dollar you plowed into those investments).

I'd much rather have liquid taxable investments that I could draw on if I/my spouse lost our jobs unexpectedly than have more of my house paid off in that same scenario. And, after all -- once those taxable assets are more than the balance due on your mortgage, you can just pay it off all then if you so choose.

(I'll also repeat something I've often said here -- WHY NOT DO BOTH? If you have $500-$600 a month extra, why not put $250-300 of that towards paying down the house, and the other $250-$300 towards taxable accounts? No one requires you to go all or nothing in one direction with those extra funds, so why not diversify in terms of paying down mortgage/building taxable assets just like you'd diversify with your assets allocation?)

Post Reply